What it means for investors — Volatility is back

08 Février, 2018, 10:01 | Auteur: Basile Toussaint

The worst of the selling could be over after Tuesday's late recovery, but pre-market trading Wednesday pointed toward another possible dip. On the social media forum Reddit, trading the XIV had proved so popular that it had earned its own forum called "tradeXIV".

"The short-volatility trade needed to be covered as volatility rose". The equity selloff has investors changing their bets on the likely path of Federal Reserve rate increases, with the market implied odds of hikes later this year easing.

Stocks and volatility tend to be inversely correlated.

Ready to get started? Think of a big bell that's been rung and continues to reverberate. The pick-up in stock market gyrations early last week drove more people to bet on subdued stock market gyrations, said Anand Omprakash, director of equity and derivative strategy at BNP Paribas in New York.

The VIX "fear index" usually signals that bad things happening in the stock market.

For younger investors, this may be their first bout with market volatility. I don't see evidence of that just yet.

BIGGEST TWO-DAY SPIKES IN THE VIX A historical look at the VIX suggests that spikes such as the ones witnessed on Monday are rare. Chief among the muscle-flexers is the SPDRS&P Biotech (ETF) (NYSEARCA:XBI). Attention today zeroes in on Tesla (TSLA), which reports after the close. One of them - the VelocityShares Daily Inverse VIX Short-Term ETN, known as XIV - will soon be extinct. Morgan Stanley's Sheets, for instance, looks at lessons learned.

Stock volatility, dormant for more than a year, is back with a vengeance.

Walt Disney (DIS), Michael Kors (KORS), and Snap (SNAP) all beat in a large way. However, CMG missed on two important factors: Same store sales and margin. The company didn't immediately respond to a request for comment.

Fear is back in fashion.

One silver lining to the crash: SVXY and XIV now lack the heft to roil markets, according to some. "It takes away what many considered to be easy money". Stocks didn't react much last month when the government shut down for a short time. "It is something that, if you have a long-term outlook, it shouldn't worry you too much".

On Tuesday, the benchmark S&P 500 Index climbed 1.7%. For illustrative purposes only. Corrections occur about once a year on average. "For that reason alone many would argue a correction was on the cards". Adding January brings that total to 50 percent. Know the level where you're comfortable getting in, and make sure you have an escape plan. The yield on the 10-year Treasury was largely unchanged at 2.724% after a significant rally yesterday as stocks fell.

Hunkering Down: It's a bit different if you're trading for the long-term.

Dave Roberts, an independent trader of volatility products and associated derivatives, noted that at the expiry of the January VIX contract, the front and second-month contracts were trading at a fairly narrow spread, in contrast to the wider gap at the December expiry.

Turns out that Friday's dip was just a warm up for the bigger event.

The fundamentals of the economy and corporate America are outstanding. So fundamentally, the warning lights aren't really flashing too bright.

So what should you do now?

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The market tipped over as a result, and we got a big sell-off. Guests and contributors discuss current market events.

"This pullback is simply helping to get some of the froth out of the market", said Tim Armour, chairman and CEO of Capital Group, which runs some of the world's largest mutual funds under the American Funds name.